Operating cash flow is the cash flow generated from the ordinary activities of a business. It can be found in the cash flow statement and helps determine whether a company’s core activities are generating enough cash to maintain and grow the business.

Operating cash flow starts with net income from the profit and loss account, add back any non-cash items and then incorporate any changes (addition or subtraction) to working capital. To create a strategy that avoids cash from operations, companies should focus on maximizing net income and optimizing efficiency reports.

The following factors will all decrease cash flow from exploitation activities:

1. Decrease in net income

The cash flow statement it starts with net income, which is equal to revenues minus all costs, including taxes. Since operating cash flow starts with net income, any change in net income would affect cash flow from operating activities. If revenues decrease or costs increase, resulting in a decrease in net income, this will result in a decrease in cash flow from operating activities.

2. Changes in working capital

The most significant uses of cash from exploitation activities are the changes in working capitalwhich includes current assets and current liabilities. Increases and decreases in current assets and liabilities are reflected in the statement of cash flows. Increases in assets or decreases in liabilities from one period to another constitute a use of cash and reduce cash flows from operations.

Working capital management is evaluated by efficiency reports such as inventory turnover, days sales outstanding, and days payable outstanding.

Lower inventory turnover

Inventory turnover it is calculated by dividing the cost of goods sold (COGS) by the company’s average inventory value. Lower inventory turnover usually indicates less efficient inventory management. Poor inventory management increases inventory levels on balance sheet at a time, which means that the inventory is not sold. This is a use of cash that lowers cash flows from operations.

Increase in outstanding sales days

Sales days outstanding measures how quickly a company collects cash from customers. This value is calculated by division accounts receivable by the dollar value of credit sales, then multiplying the result by the number of days in the measured period.

If backlogs increase, it indicates bad debt collection practices, which means a company is not getting paid for items sold. This leads to higher current assets, constituting a use of cash that decreases cash flows from operating activities.

Decrease in payable days overdue

Payable days overdue measures how quickly a business pays its suppliers. It is calculated by multiplication CLAIMS to the number of days in the period and then dividing the resulting figure by the cost of revenue, which is COGS.

When days past due decrease, it indicates that the company is paying its suppliers faster. Money goes out the door sooner, which reduces accounts payable on the balance sheet. Reducing current liabilities is a use of cash, and it decreases cash flows from operations.

conclusion

Cash flow from operations is an important measure that shows how much cash a company generates from its business activities. It derives much of its function from the income statement and balance sheet statements such as net income and working capital. A change in the factors that make up these line items, such as sales, costs, inventory, accounts receivable, and accounts payable, all affect cash flow from operations.